Early this month, the Federal Reserve boosted its benchmark interest rate 75 basis points for a fourth straight time in a bid to tame multi-decade high inflation. The move raised the key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. The latest rate hike marked the U.S. central bank’s sixth increase this year.
However, the recent inflation reading suggests that the Fed’s hawkish stance has eventually started to yield desired results. The annual inflation rate in October was 7.7%, down from last month's 8.2% and below the expectations of 8%. This marked the lowest reading since January. To put things in perspective, U.S. inflation hit 9.1% in June, the highest in 41 years. Since then, it has reduced 140 bps. While the inflation is still high, seemingly, it has finally peaked and is only expected to decelerate from here. Encouraged by the latest numbers, market watchers believe that the Fed’s next expected rate hike in December may be only a half-point rather than three-quarters.
Having said that, Fed is not likely to stop raising rates anytime soon as inflation is still quite high and far above the Fed’s 2% target. With economic uncertainty still looming, markets aren’t likely to meaningfully turn the corner anytime soon.
Focus on Value Investing
Value investing is one of the most effective investment approaches now. Value stocks perform better in a rising rate environment, which we have been witnessing currently. Moreover, value stocks suffered the most during the peak pandemic. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation.
The value investing approach seeks to profit from investing in stocks that appear to be trading at a discount to their intrinsic values and eventually make handsome returns when the stock price rises toward its intrinsic value to reflect the actual fundamentals. Certainly, the value investment strategy best suits investors with a long-term horizon.
Play Value With High Earnings Yield Stocks
When considering valuation metrics, the first ratio that pops into our minds is the price-to-earnings ratio, given its inherent simplicity. But one can also consider another interesting ratio for picking attractively valued stocks. That is earnings yield. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price. It measures the anticipated yield (or return) from earnings for each dollar invested in a stock today. While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued, while those with lower earnings yield are seen as overpriced.
Myers Industries, Inc. MYE, Cheniere Energy Inc. LNG, GasLog Partners LP GLOP and Sociedad Quimica Y Minera SQM are a few high earnings yield value picks that can fetch handsome rewards.
While P/E enjoys great popularity among value investors, earnings yield could prove a better alternative in many cases. While it is essentially a reciprocal of the P/E ratio, the metric also facilitates the comparison of stocks with fixed-income securities. Investors often compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a stock is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.
Picking the Right Way
We have set Earnings Yield greater than 10% as our primary screening criterion but it alone cannot be used for picking stocks that have the potential of generating solid returns. So, we have added the following parameters to the screen:
Estimated EPS growth for the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month forward EPS estimate with the 12-month actual EPS.
Average Daily Volume (20 Day) greater than or equal to 100,000: High trading volume implies that a stock has adequate liquidity.
Current Price greater than or equal to $5.
Buy-Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have been known to outperform peers in any type of market environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
4 Stocks to Buy
Below we have highlighted four of the 112 stocks that made it through the screen:
Myers: Myers is an international manufacturer of polymer products for industrial, agricultural, automotive, commercial, and consumer markets. The company currently sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate for MYE’s 2022 earnings and sales suggests year-over-year growth of 72.1% and 19.1%, respectively. Myers surpassed estimates in three of the four trailing four quarters and missed once, the average being 27.8%.
Cheniere Energy: Cheniere Energy is primarily engaged in businesses related to liquefied natural gas (LNG), having the first-mover advantage in exporting LNG from the United States. The company currently sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate for Cheniere Energy’s 2022 earnings and sales suggests year-over-year growth of 212.3% and 103.2%, respectively. The company surpassed estimates in three of the four trailing four quarters and missed once, the average being 0.2%.
GasLog: GasLog owns, operates and acquires LNG carriers with multi-year charters. The firm charges customers for the transportation of their LNG using its LNG carriers. The company currently sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for GLOP’s 2022 earnings and sales suggests year-over-year growth of 54% and 12%, respectively. The company surpassed estimates in three of the four trailing four quarters and missed once, the average being 40.5%.
Sociedad Quimica: The company produces fertilizer and iodine and manufactures industrial chemicals and iodine derivative products. SQM currently sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for Sociedad Quimica’s 2022 earnings and sales suggests year-over-year growth of 538% and 267%, respectively. The company surpassed estimates in two of the four trailing four quarters for as many misses, the average being 27.2%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Sociedad Quimica y Minera S.A. (SQM) : Free Stock Analysis Report
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GasLog Partners LP (GLOP) : Free Stock Analysis Report
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